This morning I was interviewed by Michelle Rook on AgWeb's Markets Now. We discussed the recent action in the corn, soybean, and wheat markets. We also talked about the Fitch's downgrade of the U.S. credit rating, the cattle market, and crude oil. Watch my interview here.
Michelle Rook: Welcome to Markets Now. I'm Michelle Rook, along with Darin Newsom, Senior Market Analyst for Barchart. We're seeing kind of a mixed trade in the grains this morning. Livestock futures trading lower. Darin, it was a tough down day and everything yesterday. Some risk aversion there with Fitch downgrading US credit, and the stock indices also reacted to that as well. Do you think it was just kind of a blip on the radar?
Darin Newsom: Yes, I do. It was interesting looking at the close Wednesday afternoon. Every sector from financials through the commodities were in the red, or at least they weren't green at the end of the day. It did look like there was kind of a widespread, let's get out of our positions and recover and see where we go from here. Now, as far as the US stock indexes go, I don't see the Fitch thing as that big of a deal.
If we go back and read, they've been talking about poor US credit ratings basically for the last three or four years. It's just now they decided to lower the rating. They actually lowered the rating. I just don't see it as a huge deal. To me, what we're looking at here in the stock markets, yes, we closed lower on Wednesday. From what I understand, it's a little lower to open the day here on Thursday. We've closed many of these indexes, both the S&P and the Nasdaq.
We've closed higher five consecutive months, and at the end of July, both were at or near their monthly high, so that opens a trap door, I should say, for some selling to come into the market, take some money off the table. They're a little bit overdone, a little bit overbought at these levels, and let them come back for a while, let them settle back, and then as we head into fall again, later into the fall, we'll probably find some buying interest.
Michelle Rook: I started off with that because it was such a dominant influence on the commodity sector yesterday with everything down. Also, we've been trading weather, more favorable weather. Do you think the fact that soybeans are up this morning have we taken out enough weather premium, or is that in response to pretty decent exports in some more business to China this morning?
Darin Newsom: I think the biggest part is it's just a back-and-forth in the soybeans right now. I think the bigger picture is it's just not as bullish as it was before from a fundamental point of view. We saw what the switch from La Niña to El Niño did with Brazil's crop. It all quickly grew to where it's been reported as record size. We don't have huge acres. We did see a reduction in acres here in the US, but with the way the weather's changed, it certainly looks like yield's going to continue to improve. Production should continue to go up, supplies are going to increase.
The issue remains demand. Yes, we're making some small sales to China, but again, they're just kind of hand-to-mouth. We're still a secondary supplier. Are they going to step in with the US soybeans melting down the way they have? My biggest concern right now is we are seeing some pressure in spreads but it's basis. It's just collapsing at this point. I think we've lost something like 20, almost 20 cents in basis alone so far this week, and we're only at Thursday morning. I think it's something we have to keep an eye on, certainly indicating that the commercial side's growing very comfortable with longer-term supply and demand.
Michelle Rook: During that grain basis breakdown, not just in soybeans, then in all grains [crosstalk]?
Darin Newsom: Yes, we're seeing some of it in corn. It's not quite as severe in corn. We're still holding a pretty good premium to the September contract. Again, what I see here is that the US supplies have been tight throughout the 2020/23 marketing year. Yes, demand is slow. We've seen a slight uptick but nothing to get too excited about as far as export numbers go. We have seen a bit of an uptick. Basis is holding firm without really strengthening all that much.
The markets that we really see a hit coming is in the wheat. All three classes of wheat are running very weak basis at this point, with the fundamentals in Chicago, actually, some of the most bearish that I've seen over the last 30 years or so.
Michelle Rook: Wow. What do you attribute that to, that bearish outlook for wheat?
Darin Newsom: Basically, we can make all the noise we want to about Ukraine and Russia blowing up ports and grain facilities and all that, but it doesn't change the fact, right now, it seems the world just doesn't want US wheat. It comes down to if there's one bushel of wheat left over, it's too many. Now, all that being said, as we look at the latest weekly export sales and shipments numbers, we are seeing a trend towards increased wheat exports from the US. This is something we've been looking for right now. It's not making that big of a difference in the real fundamentals of the market.
As we're talking about this, it's interesting to note that the September, December Chicago spread was covering 100% calculated full commercial carry at Wednesday's close. This is a big deal because if we continue to run this high, if carry continues to stay this strong in the futures spreads, we could see where variable storage rates start to kick back in. If we're still running this strong on the 25th of August, by the time we get into mid-September, those rates are going to change. Those official storage rates will change.
Michelle Rook: Since we're talking about weekly exports and shipments on corn, still not very good, are they?
Darin Newsom: No, we're still on [unintelligible 00:05:20] to ship about 33% less than we did last year. That's where we've been. There's just nothing really happening there. It's staying pretty stable. Again, exports are the smallest of the three legs of demand for US corn. The big concerns are feed and ethanol, and feed demands come down as well with fewer cattle. Ethanol's been stable, but exports are running slow. We're not really building a lot of sales for next year either, next marketing year either.
Again, it's going to be a concern, particularly if you know all of these acres the US supposedly planted produce relatively well. As we can see in spreads, the commercial side again just is not as bullish as it was before. They're growing more comfortable with the production possibilities for later this fall.
Michelle Rook: Yes. We should talk technically, all the grains are down into some pretty key support areas here. Soybean is bouncing off of it, but we're flirting with it here [unintelligible 00:06:15] this morning.
Darin Newsom: Yes. I think the prices we really have to watch are September at 474 and December at 481. Those are the July lows. If we can hold those levels, then maybe we can start to find some [unintelligible 00:06:29] buying it. Just my concern, if we look at the cash index, if it continues to break down, and if we post a new low monthly close here at the end of August, I know it's only early August, but if we post a new low monthly close for 2023 at the end of this month, then we're still on that path laid out between 2010 and 2014 that we've been following here from 2020 to '23.
That would suggest, and I'm not a big believer in analogous years, but it would suggest that we've got more room to the downside with the cash market, possibly not bottoming out till next spring, maybe early summer.
Michelle Rook: Let's talk about weather because we do have a seven-day forecast, which will look like the northern part of the Corn Belt in the northern plains are going to get some pretty good moisture. If those confirm, how negative will that be for corn, beans, and even spring wheat?
Darin Newsom: I would think we would continue to see some pressure. The interesting thing is funds are still or at least were still along the corn market as of a week ago this past Tuesday with the Latest CFTC Commitments of Traders Report. As long as they're still holding, that leaves some room for the downside, particularly if funds liquidation continues. Also, commercial is going to continue to get more comfortable with this position.
They're going to continue to sell. That's going to put pressure on the nearby contracts and more on these contracts, so that would make it seem like that 481 is going to be tough to hold if this weather plays out.
Michelle Rook: The cattle market, let's talk about that one because we sat back yesterday in response or in reaction to what was going on in outside markets, stock market included. Today, we're down again, but we've had not much cash trade. What we've had is when sloppy and choice boxes are back down again, so are those contributing factors?
Darin Newsom: Oh, they certainly are, Michelle. I think we have to look at this market because you and I have talked over the last few weeks, these cattle markets have been looking a bit top-heavy, and as we move into August, it's not as many contract cattle, but there's some contract cattle coming through here early in the month through the first half or so that we're going to have to wade through.
As you said, with the cash markets being relatively undefined here the last couple of weeks, we've seen a little bit of trade done late in the week but not a lot of strength. Those who are looking to sell are holding off, bids are coming in lower, packers are looking at boxes, beef market's coming down, so they're really not willing to push the market knowing that that contract cattle is coming out. Again, we're just kind of at a stalemate right here and futures are reflecting that coming under a little bit of pressure.
Michelle Rook: Yes, and choice boxes were up there when the packers were cutting kills. We'll see if they can keep that going for a while here or not. All right. Let's end with crude oil because we went up, tested the top end of this trading range that we've been in here, but yesterday got caught up in the macroeconomic sell-off. What do you see longer term for this crude oil market?
Darin Newsom: Right now, I still see it moving sideways. It's something like a $20 range. If I recall, something like $82 to $62 or something like that. We did see news this morning that Saudi Arabia was going to push its production cuts at least another month back out into September. We'll see how the market reacts. So far, it really hasn't been able to break the market out of this sideways trend. To me, it's going to come down to, can we post a new four-month high with the spot-month contract?
If it does that, then I think we're going to see some buyers come in, we're going to see some algorithms kicked in. Until then, I just think it's going to be a lot of chopping around, and we'll just have to wait and see where the money flows. If some of this money then starts to come out, if it starts to come out of stock indexes, is it going to go over into the energy complex? Is it going to stay in the source because that still seems to be kind of the hot sector, just different markets at a time, or are they going to settle into something like energies and metals?
Michelle Rook: Do you think the rally that we've had here recently, has that been geopolitical or has that been a supply-demand thing or what?
Darin Newsom: That's a great question, Michelle. It's almost always geopolitical in the energy complex in crude oil. We can still look at those spreads, and we still see that they're inverted, so the forward curve is inverted. This tells us that supply and demand is still an issue, that there is still a layer of fundamental support underneath this market. Once we get through all the geopolitics, it still comes down to supply and demand.
Michelle Rook: All right. Thanks for joining us, Darin Newsom, Senior Market Analyst with Barchart. That's Markets Now.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
